Beanie Babies at the Center of Tax Scandal?

Who would've ever thought Beanie Babies would emerge as part of a tax evasion scheme? Only in America. But on September 19, the sixty-nine-year-old billionaire creator of Beanie Babies, Ty Warner, was hit with charges of tax evasion that started with the fortune he made when Beanie Babies became a kid craze (and an opportunity for collectors) in the mid-1990s.

Here's what happened

Warner, a resident of Oak Brook, Illinois, is accused of hiding more than $93 million in a secret United Bank of Switzerland (UBS) account. According to the charges, the money was hidden between 1996 and 2002, years which happen to coincide with the Beanie Baby craze.

The charges also state that in 2002, he transferred the money in the UBS account to a second account in another bank, the Zurcher Kantonalbank. Money in those accounts earned him $3.1 million in investment income, on which he should have paid US tax of $1.2 million. More than a decade later, his secret accounts have been uncovered, thanks to the probe of foreign banks. Warner is now looking at a possible five years in prison, back taxes, and a maximum fine of $250,000 in addition to taxes owed.

Failure to Cooperate with the IRS a "Death Sentence"

Foreign banks and other financial institutions have been "asked" to help the IRS uncover secret accounts held by American taxpayers. At least this is how the program has been marketed.

For those banks that fail to comply, the Foreign Account Tax Compliance Act (FATCA) imposes a stiff 30 percent withholding tax on their US source income. "This penalty is viewed as a kind of death sentence, effectively freezing them out of US financial markets," reported Forbes magazine.

The tensions aren't only with the Swiss government, but with many different countries. Rather than giving information directly to the IRS, foreign banks are permitted to provide the data to their own governments and let the governments do the real dirty work.

US Attorney of the Northern District of Illinois Gary Shapiro said in a statement Warner has agreed to plead guilty. "Regardless of wealth, everyone must pay taxes on all of their income, not just the amount they choose to report. The charge alleges that Warner went to great lengths to hide from his accountants and the IRS more than $3.1 million in foreign income generated in a secret Swiss account. Such conduct invites federal prosecution."

Warner's attorney, George Scandaglia, said, "This is an unfortunate situation that Mr. Warner has been trying to resolve for several years now. Mr. Warner accepts full responsibility for his actions with this plea agreement."

Scandaglia said Warner also will "pay a civil penalty of $53,552,248 for failure to file a Foreign Bank Account Report (FBAR)."

UBS Agrees to Help the IRS

Warner is one of many people with offshore accounts recently targeted by the IRS, with the cooperation of UBS. The Swiss bank and the IRS reached an agreement in 2009, wherein in exchange for information on accounts held in the bank that had been secret, the IRS would bring less severe charges against the bank. Since the deal was struck, other banks from Switzerland, India, Israel, and Barbados, have also joined in the agreement.

As a result, the Department of Justice says it has brought more than sixty US taxpayers and thirty banking professionals into compliance, adding billions in tax money to Treasury coffers.

Warner's net worth is about $2.6 billion, said Forbes magazine. Forbes ranked him at the 209th richest American. Warner is also well known as the owner of fabulous hotels and resorts around the country, including the Four Seasons in New York. Beanie Babies are still available on the TY Inc. website, most for under $10. At the time of the Beanie Baby craze, they were the "must-have" toy and sold for several times their value.